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tv   Market Makers  Bloomberg  December 3, 2014 10:00am-12:01pm EST

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live from bloomberg headquarters in new york, this is "market makers." oilhockwaves from the fields -- we will talk with blackstone's head of private equity. the fall of bond king bill gross and his final days at pimco. >> plus, defending his record, america's chief executive the president meets with a skeptical group, ceos of some of the nation's biggest companies. good morning on this wednesday in new york city. get to to cover so let's
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the top global business stories. another sign of progress in the labor market, u.s. companies 000 workers last month which is the seven-time in the last eight months payrolls have climbed by at least 200,000 according to adp research. the payroll report is a out officially friday and it is expected a gain of 230,000 jobs. record.nday set a sales according to research firm com score, shoppers spend more than $2 billion online monday. growth is officially slowing and consumers of and spreading out there shopping two other days during the holidays. on ready for fireworks again capitol hill. this morning, congress will question an executive from the airbag maker who is refusing to issue a nationwide recall. rejected the recall
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demand by u.s. regulators and the airbags are lame for at least four deaths and they have recalled cars only in states with high humidity which is partially blamed for the malfunction. ralph nader says takata thinks it can get away with defying the government. >> they think the department of transportation is a patsy and it will not throw the full force of the law against them. they have been sitting on these airbag defects for years now with deaths and injuries and anxiety levels going up. >> safety regulators say they are now considering their next move. it looks like has lot owners are true believers. model s arehe tesla more likely than porsche owners to say they would buy their car again according to the consumer reports survey. it's the second year in a row that tesla has topped that list. some might call tony blair's holiday greeting card the
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nightmare before christmas. i feel bad for him. the card shows the former british prime minister and his wife is burning up the internet. they said it looks creepy and terrifying and odd. cut him a break -- you can judge for yourself in one observer said the oddest thing is that this must've been the best photo of the two. he looks fine, give the guy a break. >> he looks startled. >> who cares? do you expect a full glamour shot? >> it was a professional photograph, almost certainly. >> i had to get three kids and a husband and a picture in front of a tree. that is hard. who cares that much? it's a christmas card. next year, they are not doing a photo card for sure. >> let's talk about blackstone which has become so big in everything from real estate to hedge funds and distressed debt,
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it is easy to forget the firm started in private equity and remains one of the biggest in the business. their $285 billion in management is under private equity. it's a great time to be in alternative assets. private equity has its share of challenges. there is regulatory scrutiny and joe barata is back with me and stephanie. >> ar-15 problems facing our business. you have a world of problems. >> oil is at $67. you are energy investors. you have two discrete energy investing funds. how viable are those investments with oil at six to seven dollars? >> what we do in the energy area is agnostic to the oil price. we are investing in energy transportation infrastructure.
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we are earning a rent on using the assets in heaven offtake agreement. it's agnostic to the underlying price of natural gas. we are investing in merchant power plants in the united states. renewablessting in projects. we are investing in fossil fuel andr plant developments renewables in emerging markets and they have nothing to do with the price of oil. we also do a lot in natural gas. we have been more bullish on natural gas. natural gas is down this year only about 9% compared to the 30% drop in oil. we have exposure to oil somewhat. however, we think this is a momentary decline in the price. it will not be structural. this is not a demand-side problem. demand is ok globally for refined products. it is a supply-side issue. in thely, the shale
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united states is well understood and opec is not cutting productions. will stop being drilled and that will reduce the amount of supply. prices will snap black and we view this just prices will snap back and review this as volatility which we love. it allows us to invest at better moments in time. buying oilbably be assets at better prices over the next 12 months. >> really? you view this as a buying opportunity? >> long-term, we still believe the forward price deck for oil will be well above $80. if you look at the demand side of the occasion -- of the equation relative to the supply side like shale in the united states, we continue to be bullish much longer term on the price of oil. >> are there already forced sellers? >> there will be, bonds are trading down, significantly in some instances. it is a sector that needs
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enormous capital in the credit markets. credit investors are impatient if they are not getting their coupon on time. there will be distress and an opportunity to recapitalize some of these overleveraged situations and we will stand and as we can to make clever investments. do you think there will be multibillion-dollar opportunities? i do, if you look at the scale of capital required to extract the hydrocarbons and transport them around the world, it is many hundreds of billions of dollars if not more and private equity has an important role to play in that. some of these things are not readily financed in the public debt equity like development oriented products -- projects. >> you have to have long-term money? >> you have to have a certain degree of risk. projectd the sheneer than it needed $15 billion of
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capital of something that did not exist and you will not fund that in the public debt equity markets of private equity was required to develop that and it will be a great thing for the country and great for the recipients of that lower-cost natural gas in europe and asia. longer-term money means you don't have to worry about the volatility and the ups and downs in the oil prices. can drill as long as you have a liquidity would you do. does that suggest that the model that has been dominant in the shale oil and gas business is to vulnerable? you have independent expiration companies financing themselves with junk hans -- junk bonds and overnight can become viable? >> there is bollocks -- there is volatility in the oil and gas area. we have heard that since the 1970's. the thing with financing oil and gas exploration and development
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is that people know what they are signing up for. and itslobal market financed through junk bonds, not through investment grade credit or banks using depositors money. its reliance on the capital markets and the risky and of the capital markets. we like the volatility it creates is opportunity for us to enter more aggressively when prices are down and there is distress. do you think junk bond investors today have the risk appetite for volatility? they did five or six years ago. there could be some surprise to the downside in terms of default rate. in terms of default rates, spiking is a narrow measure. i don't know the facts on how much of the junk bond universe is in energy. there has recently been more issuance in the energy area but
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if you look across the whole oriented junk&p bonds would be relatively small. >> if this lasts, this could create opportunities for you. that would not be a bad thing. so far as i can tell, you have not been as busy perhaps as you might like. why does it seem from a distance that it is so hard for blackstone to find good private equity deals? i'm pretty sure you can look at his travel schedule and say he is busier. >> my family would say that. let's put it in numerical terms -- >> you have been committing at three times capital? >> that's right, this you're a bit less but that's right. we had been pretty busy on the buy side. in this market, you have to navigate carefully. the prevailing market prices are high as a result of what's happening in the equity markets. that is prettye
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big right now among investors. prices are a high and you have to find companies you can transform postacquisition. this is so you can be more in control of your destiny rather than relying on high multiples at exit to make your return. you are used to hearing about large public to private but those are not happening now. we are not finding compelling value and the ability to transform these companies once we buy them. we are tiptoeing in different areas. we are doing mid-cap deals where there is a great platform company hoping to double or triple the size through add-on acquisitions and consolidating industries. half the deals we have done this year have been the buy and build which is one of our best areas. we continue to become a strategic buyer.
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invest in some of these development and energy infrastructure projects particularly on the power side. >> if you are not buying, does that suggest that they are overpaying? >> we don't see the same value. they've got a different model or different capability to intervene postacquisition. ,e have a slightly higher bar our risk tolerance is lower maybe that was 1.5 years ago. does that mean you are less bullish on the u.s. economy than you were two years ago? where quite bullish on the u.s. economy and we see that through our portfolio companies. we are growing at about 10%. the snp has grown about 5% so we are doing a bit better. are seeing a preview --
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robust u.s. economy. it is range bound and i think consumer spending has to be the big engine of the u.s. economy, 70% of gdp. i don't see that in place for that to pick up. you need to see a resumption in the housing cycle and construction. we are not seeing as much of that as we thought we would. u.s.e confident in the economy. our portfolio companies are doing pretty well. >> based on what you see in your portfolio companies, you have a slightly different view of what you will get through the lens of the s&p 500. the s&p 500 is trading at 17x forward earnings. do you believe the outlook for gdp growth justifies a valuation like that? >> perhaps not. it depends on what you think interest rates will do over the very long period of time.
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interest rates stay low, i think the market is valued fairly. we expect a couple of years of continued reasonable compounding in the equity markets and i think that will continue. global cost of capital has to go back to the way it was for the last 50 years. i would assume that. maybe it doesn't but you need to assume that it will. to make sure our portfolio is protected in the eventuality that happens and the ten-year treasury goes back to /e multiples are 15 instead of 18. we have to make money in that cycle everything we are doing in our portfolio now inoculated us against that happening eventually. if it does not happen, it will be fine, too and our companies will be worth more and we should have invested more but i will take that bet. if we absolutely have to protect the downside for the investors. why are take away is
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people putting so much money into private equity? heads he wins, tales he wins, i get that. let's take a quick commercial break and we will back in two minutes." ♪
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>> welcome back. we are talking with the global head of private equity at blackstone. you told us that blackstone's risk tolerance and love -- and private equity is lower than it was and you are taking a conservative approach to the will win.als you our private equity returns going to compare with the returns from the other asset classes that blackstone is in? you got real estate and credit opportunities -- historically, our returns have been able to compound over
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longer. as time because we hold the assets for longer, five or six years. the multiple of money we are able to generate in our funds is typically a bit higher. the real strength and private equity is that we have this locked up committed capital so when the world gets bad as it nobody calls us up and says send me my money. they do not force us to sell things at the wrong time. if we manage the fund properly, we have undergone capital and nobody did that better than our real estate guys. brought a lot of good assets and we had less undrawn capital but we backed up the truck as much as we could in 2009 and 2010. not having to sell things when the world gets bad and people want liquidity is a real asset for our investors. where yount like this are worried about looming volatility on the horizon and
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having money in private equity is a really intelligent thing to do. >> let's talk about your hedge fund is fund. does it make sense given how poor hedge funds are doing across the board? >> it does because the large institutional investors have to deploy large-scale capital. they need balanced and hedged equity exposure in an intelligent thoughtful way. >> are we still making the argument that hedge funds are balanced and hedged? when you look at the best >>, they are just long or short. >>our team designed to certain kind of risk that the investors demand. it's much more active in creating a program and finding a solution for problems that are big push and fund clients. here tohedge funds are stay and they do protect capital. >> to generate the returns that you do, you need leverage.
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the fed has brought a lot more scrutiny to leveraged loans over the past year or so. how is that affecting the blackstone access to dad? >> it affects a little bit on the margin. we have not yet had a problem getting a transaction we want financed financed. anything that constrains leverage which lowers purchase prices, i am more or less in favor of because as a buyer of would like to see things get cheaper. it is ironic that the fed is regulating something that is basically an outcome of the monetary policy they have created. the high yield bond fund it performed externally well even through the downturn. i think it will continue to do so. even right now? >> i think default rates will pick up. i think the business is being funded have staying power.
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the sponsors have proven an ability to keep these companies alive by investing more capital and extending maturity. the high yield bond fund was foretold to have been gone in 2009 and it did not happen. maturities and sponsors stepped up and put more equities in the toinesses and did things improve the operating performance of the company. i think the high-yield bond and costse is toppy are historically low but it will be ok over time. a year agoold us that before the financial crisis, blackstone was contemplating a $100 billion deal. i know we are not there any longer. what is the biggest deal you can finance today? >> probably -- probably $12 billion. that is in this market with the fed scrutiny.
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the capital is there, it's a question of seeing the value. can you make the returns? >> how many of those deals have you looked at over the past year? >> probably five or six actually. >> you passed on all of them? >> for one reason or another it did not come together. a couple of them we saw the valuable could not make the deal happen in a friendly manner. still out there plugging away. we did a large deal in february-march. >> we have to run but it is great having you. we will be right back. ♪
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what adjusting to the price
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of oil means for the energy industry. and howthe bond king bill gross lost his empire in a bloomberg exclusive. ♪
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live from bloomberg headquarters in new york, this is "market makers." the fall of the bond king, bill gross. thanks to mary childs, we have or heardore seen details of what it was like at pimco before his forced departure. >> first of all, good on you. >> thank you. >> it took months but what surprised you most?
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>> it was the mole aspect and the fact that he got fixated on somebody being a mole within the company. i think it drove him crazy and he had no ability to let it go and management was confused by that and there was friction over that. it ended up being a major breaking point and its very surprising. not readyone who did it, you've got to read of this story. what was going on there that last year? i i was a pimco investor, would think inside that firm they were focused on bull markets and investing but it does not seem like that. >> i think they got distracted by a lot of the personal issues. when mohamed el-erian left who had a co-manager role, that ate away at bill gross and he had a hard time coming to terms with it. he took over the managing responsibilities but he did not like that stuff. also, it was genuinely hurtful and he was upset. as he saw these things making it into the media, he felt betrayed
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because he fell people with them the firm were spies and were leaking and undermining the firm. >> aren't they supposed to be focused in investing in the global markets? >> it ended up being a gossipy and bill thought like he was always on tv so his image was important and having that undermined and interior it hurt him. >> who did he finger? >> he seemed to fixate on mr. x and mr. y. thenw ball in london and josh timmons who through the going away party for mohamed el-erian which may have put a target on his back. >> doesn't this sound like "gossip girl? " >> it became very distracting and i think the overriding thing over the year ended ended up hurting people's ability to stay focused. else,l more than anybody
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the total re-firm fund relative to his peers was not doing so hot and people like dan iversen were still knocking it out of the park on their funds. that might be attributable to the asset class. right, but it is a catch 22. total return underperformed, he saw it as a reflection of himself. it hurt his own view of himself so than it hurt his ability to manage people and it builds on itself. >> what does this mean for bill gross in his new role at janus, what are people saying? >> he's off by himself and has some i.t. guys and secretaries. magneto in histo own little world anyone it to be in a sidecar vehicle and wanted
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to manage a couple of billion dollars. >> did he want that or did he want to control everyone in his universe? >> he dead but the universe got too big so he noticed has a small universe. >> that sounds crazy to me. >> who is charles xavier? >> maybe iversen. there was that puzzled look. >> i'm puzzled when i talk about the kardashian's. >> eyewear that like a badge of pride. >> what is your take away since you put this story out? reactions hasmain been that there was some as dysfunction for so long that it's incredible it worked for such a long time. >> shouldn't that mean they should be able to maintain more assets? they are still losing assets. >> it's slowing. the peak of the loss of abscess
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-- of assets happened in october. the peak was 2005 and we are on the better side of it. percentilein the 99th last year so they seem to be doing a pretty good job about turning down the hatches and retaining clients. i'm curious what it means for bill. with the george soros endorsement of half $1 million is huge. that's a great name to have behind you. >> bill gross has an extraordinarily long track record, decades long. >> because back to 1971. >> he is a legend. >> great story and thank you. >> you've got to read it. >> you can see it on these are details you have never seen anywhere else. >> coming up, the next big thing in technology, we will go out to
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the big tech conference in arizona to find out. ♪
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>> welcome back. country's top venture capitalists and entrepreneurs are in arizona today for the 18th annual technology conference. you, i am here with frank artelli from ignition partners. >> glad to be here. >> i read a statistic that venture capital funds are expecting to receive $32 billion worth of cash this year which is the most since 2001. is it a good time to be a venture capitalist? >> being in the business, i agree it's a great time. with all of this capital available to us as investors, we can invest in more companies and create more real innovation.
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on the demand side, we're in a situation particularly with enterprise software that is for businesses, there a tremendous fromd for new technology businesses of all sizes to be more like the public internet sites they use and observe us consumers. and try toes evolve reply from themselves, it's a great time for innovation and build companies to go after that. >> that cash can be concerning because i had an old professor years ago that said when all of the money is going one way, maybe it's a good time to go the other way. is there any concern about the amount of cash that is flowing? >> when you have too much supply, you have concern about that. we also look at cycles. this cycle feels like the cycle of the mid-1990's when the real buildout of clients over computing and pc-based consuming and local area networking started. like that time, we need an awful lot of capital to make the change and the change back then was the change from midrange
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mainframe to client servers and the chains that is happening now is around mobile and big data. it requires a lot of capital to create the companies that need to make that happen. >> it has been a good trend for startups and you look at uber which is said to be raising $40 billion. is this something that could fundamentally change the way private capital's race? do they need to go public? the question of going public is asked all the time. capital,ability of companies can stay private longer he continue to innovate outside the public eye. companies ofhe being secretive but when a companies innovating, it's spending an awful lot of money on r&d. a public market investor will look very hard at the bottom line. when you are a private company come you don't have to act under those behaviors. you can continue to innovate and do the right thing without the scrutiny of earnings getting in
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the way. >> then you look at that cash burn rate and it could be concerning for a company of that high a valuation? >> of course, the cash burn rate , when it comes into play, it's a big concern. company can stay private long enough, they can gradually taper off the cash burn to a situation where the company grows into its boots overtime. it really cannot do that with the availability and willingness of capital to come in to the company. have seen this week with a couple of software companies that set to answer their ipos at a price that is at a lower valuation than their latest funding round. that is of concern to many people because it means a down round in the ipo -- if this trend continues, what you see happening? orwe have seen that of late at a filing, the ipo could be offered at a lower price than
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the last round. it's a concerning issue for lots of us in the capital venture industry. with the availability of capital, we have the flexibility for companies to stay private longer and effectively grow into those valuations. it is really a decision made by the company and the investors to go public or not. the great availability of q that you mentioned enables us to make those decisions. the mosts going to be talked about area and software for 2015? >> largely come i think it will be a trend that will continue from 2013. it is areas of the data and data enabled enterprises. for the past few years, we have seen the buildout of the infrastructure like we had in the 1990's when the relational database took old and independent service. now we see big data taking hold inside of his this is of all sizes. we will now see lots of things happen around the big data
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databases, things that will protect them and an able access and allow more people to use the data. that is a trend we think we will see for the next few years. >> it is big data across all sectors? correct, when we think about investing, we think about investing in businesses of all sizes but not contained in the largest federal agencies or the largest financial institutions sizes.inesses of all . people will be able to access and collecting correlate and use analytics in ways they have not before >> thank you so much for joining may. >> thank you so much. she is joining us live from the 18th annual technology conference from credit suisse and she will have more interviews throughout the day. at 1:30 p.m., she will speak with the pandora cfo. hopefully we'll get a taylor swift question in there. we know how spotify feels about taylor swift. --we know how taylor spirit
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taylor swift feels about spotify. i am not that into her music but she impresses me. but i don'tnoying like her being the new ambassador to new york city. will take a quick commercial break. we will continue this conversation we will talk about the new oil world order. ♪
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>> welcome back. oil seems to have stabilized this week at least for now at $67 per barrel which is down by 1/3 since june and if it stays at that level, it's likely to have it big impact on oil and gas exploration. let's take a closer look at what it means for some of the companies with the head of exploration research at local hunter securities. just a few moments ago, we were speaking to blackstone who says $67 per barrel he thinks is a moment in time and we will go back up.
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♪ >> live, from bloomberg headquarters in new york, this is "market makers," with their excess air and stephanie ruhle. >> hail to the chief, the country's chief executive, president obama, meets with the ceos of america's biggest companies. there may be some tough questions. >> what happens after major -- gorulings go and that against fannie mae and freddie mac? we will speak to the man with the plan. >> welcome to the second hour of "market makers." >> it is 11:00 in new york city. a few minutes from now president
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obama will be speaking to some of the nation's top chief executive officer's. he has long had a contentious relationship with the business, but he has opposed big business. even while supporting him on stuff like immigration, for example. phil mattingly is in d.c.. fascinatingalways --see what kind of a tome tone the president adopts when talking to the nation's top chief executives. what will we hear from him today? >> the tone will be that he is here to work with you. you nailed it, the relationship between the business community, the president, and the white house in general has not been great over the last six years, but over the last year or so what you hear constantly when you talk to lobbyists that deal with the white house on a regular basis is that the white house pitches this -- you may not agree with all the policies, but the other guys are crazy. that obviously comes from the
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government shutdown from last year and the continued brinksmanship on the debt limit debate. things like that. what you will hear from the president today on the top line is that the business is doing ok in this economy and there are areas like on infrastructure spending where i want to work with you. the big thing that you will hear is the undertone, which is -- look at what the other guys are doing, at least we are trying to bring common sense to it. is it true? not necessarily, but i think that is the pitch. >> is the president also going to tell them that he is prepared to work with the republican congress? >> i think that on areas like infrastructure, trade, and taxes? yes. those are areas he has laid out where he thinks things can get done. the interesting thing will be what he says over what is going on on capitol hill right now, with house republicans trying to figure out someway to fund the government passed september 11. there are some major issues that john boehner is dealing with
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there. how the president talks about what he did with immigration unilaterally and how they react will be interesting because that will be the key to whether or not he can get along with a republican senate next year. >> the president is also scheduled to meet with mitch mcconnell later. what can we expect there? >> it is the bourbon summit. we are not sure if bourbon will be served, but it is the big thing that he talked about in the postelection press conference. aides on both sides say that they are talking about legislative priorities, things that need to get done next year. one thing that you might hear the president talk about today, a series of deadlines coming up next year in march, april, may, june, on key issues that business cares about. government spending bills, things like that. or is a lot of uncertainty out there right now that mitch mcconnell and the white house want to figure out a way to eliminate. that will be on deck.
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much, phil. very that is phil mattingly in d.c.. >> let's keep this conversation going with a man who knows the government and the street inside and out. a former chief restructuring officer the u.s. treasury, serving as the ceo of his own financial advisory firm. so, the white house says that you might not like everything we are doing, but the other guys are just crazy. what do you make of that? >> it is hard to deal with a guy who says that his number one job was to obstruct the president from accomplishing any part of his agenda. this is mcconnell, the guy he is going to sit with. these guys, unfortunately now for the country, they have to work together on a there is no way around it. >> do they? >> they do. >> hold on, didn't they have to work together for years ago, two years ago? like they did, but for the last few years of the administration republicans controlled both
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houses of congress. if anything is going to get done , they have to find a middle ground. >> it still suggests that they do find priorities. i think we have all been presented with good reason that they do, yet they have been unable to agree on those issues until now. why should the next few years be any different? >> republicans are playing for 2016 and they want to prove that they can govern and actually get stuff done rather than being a party of obstruction. therefore they will have to engage to try to prove that they can levitate and resolve their own internal differences between the tax spenders and deficit hawks. >> what do you think about the argument that the white house makes when they say that stocks are up, look at gdp and unemployment, we are great for business. argue with results, right? the fact of the matter is that we have pulled out of one of the great financial crises and recession of our life time. out of itn't pulled
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organically. we pulled out of it with artificial stimulus that fueled the market like heroine. >> that's true, but the truth is down, employment is up, business investment is up about where you would want it to be and you have got real growth in the economy again. >> what do you give to the administration for that? >> all of it. congress has done nothing. >> would you not give it to the fed? >> you would have preferred a better balance, but you could not get anything to the congress for the last four years. except sequestration. again, because -- >> does the credit have to go to the administration? here is what skeptics would ask, what is it that the administration has done to boost the economy? right they have held the line, avoided the worst of what might have otherwise come down and allow this monetary stimulus to actually take effect.
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>> with the fed? >> no, no, the excesses that a divided republican party could have produced could have been much worse. we saw it in 2011 in the debt ceiling crisis. we pulled that back from the brink. they cut a deal on sequestration. something the president was not in favor of to begin with, he wanted a grand bargain. >> many would say that he undermined his own chances. >> it takes two to cut a deal and obviously the deal failed. both sides bear responsibility. no question about it. but -- >> it depends on the narrative that you'd subscribed to. >> i think that both sides bear responsibility, without question. both sides have proven themselves unable to cut a deal. you can blame both, not one. >> what tone would you tell the president to take in front of these ceos? >> the town? tone?
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>> what he should say -- >> there are crying needs in this country going unmet. crying needs going unmet. whether it is tax reform, infrastructure spending -- we are forming the various credit support programs that we have to around the system. we need a better fiscal policy. we cannot rely on this monetary stimulus forever. >> what present -- what question would you ask the president? >> how are you feeling? [laughter] you know, he's had a rough go of it. this has been a tough couple of months, right? this election was a very difficult wake-up call, i think. >> the republicans made so much out of obamacare and the affordable care act. jim, do you think that things would have been particularly different in this most recent midterm election had the president not ash putting this in the terms of his critics --
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are rammed obamacare through congress in his first term? should, could have, have, would have. i think the real failure was to sell obamacare. >> what do you mean? >> they let the republicans take the narrative. there have been so many self-inflicted wounds. this is a major new program, of course there were going to be pickups. they may have created false expectations as to how smoothly it could go, but they should have prepared the way better. more importantly, they allowed the republicans to steal the narrative, it became a life or death issue for republicans as opposed to the expansion of the insurance safety net to the uninsured, something that most americans if asked would support. >> what gives you confidence that now you will see both sides working together? clearly, they haven't yet. what makes you say that this is the moment they are going to? many people have lost faith.
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>> i think that the first question of the day as to whether anything constructive comes about is whether or not the republicans can actually resolve the internal schism between the deficit hawks and the tax spenders. there is a group of those republicans who think that the best -- the best fiscal stimulus is lowering taxes. the question is, how are you going to reconcile their desire for budgetary discipline with a desire to stimulate the economy to stimulus? this is been a tried-and-true republican policy that they run on but cannot afford. how do they reconcile that? if you can reconcile that, you will see a breakthrough on trade, tax, corporate tax reform, some of the things that both sides of said they are prepared to move forward with. toi want to shift topics fannie mae and freddie mac. you have been very active on the sun -- on the subject of reforming these insurance giants.
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first of all, with this, as you well know -- were all i know you may be advising these guys, hedge funds have been trying to make the case that fannie and freddie have been sweeping profits into the u.s. treasury. has beentreasury sweeping profits into its own coffers. is that deal way? >> i am not representing those guys. the courts are going to handle this, there are four or five lawsuits pending, taking action, complaints that this violated the administrative procedure act. the more interesting question to me than the one i have been more trying to be a part of the we ande on is -- how do the conservatorships? we have government control over the two largest factors in the insurance market. this cannot be a result of the republican or democrat embrace. the issue is -- the administration supported the effort, the legislative effort that senators corcoran and
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warner started and johnson picked up and ran with. ambitiousemarkably attempt to reform and remake from the ground up the second-largest securities market in the world. that it wasay governmental overreach. i think it is scared. main street america is scared. wall street. i think that that is why the bill failed. they are really saying that that $11 trillion market in which fannie and freddie are central weyers, forget about that, will remake that market from the ground up. think that everyone in the country who paid attention to the dynamics of the mortgage market said that it might work, but if it does not work you are really putting home prices and mortgage credit origination formation at risk. disaster for the economy. >> in the hands of private investors in the long run is what it should be. >> great, but we all remember what happened in 2007, 2008. they all ran for the hills and
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mortgage credit origination stopped dead in his tracks. >> that's right. >> no, no, but actually in this free-market that we have designed since the great depression with the bank regulatory scheme and the housing finance guarantee system was exactly what was supposed to happen. cyclical providers of credit. private investors are nervous in the credit market. we have these entities stepping in. here's the point i have been trying to make on every -- to everyone on the hill. 2008, it wass in the homeownership economic recovery act of 2000 eight. the government used it to put fannie and freddie into conservatorship.
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they were undercapitalized. that was the first statue to create a resolution for fannie and freddie, to create a capital regime and to appoint a new regulator. we never let back system work. we said we would be back later. >> when you reference private investors running to the hills in 2007, 2008, those same hedge funds are getting leveraged off again but people are not noticing. are you concerned? >> i am concerned. when you look at the measures that regulators looked at of leverage in the system, while the systemic financial organizations at the center of the crisis last time, while they are much better capitalized and less levered, the shadow banking system is much more levered. hedge funds leverage now is approaching the levels it was in 2007. the chicago fed keeps an index
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of leverage indicators and that is actually looking even more levered than 2007. so, we are at a stage where the leverage in the system is approaching levels where the last time we saw this it was very unstable. >> jim, we are awaiting the president, he is going to be speaking at ceo ross at the business roundtable. -- ceo's at the business roundtable. ♪
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>> we're standing by to hear from president obama, he is scheduled to give an opening statement to the business roundtable and then take questions from those ceos. let's bring back bill mattingly and peter cook. but start with you, bill. this president has had an up-and-down relationship with
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these executives. >> throughout his first term, because of the nature of the legislation they were pushing in the white house, through the affordable care act, from dodd-frank to the wall street side and the reelection campaign of 2012, they really felt the president and his team were attacking them every single time they went after mitt romney and it has been a tough road. white house officials acknowledged that after the 2012 campaign and have tried to use house republicans and what they are doing on capitol hill as a way to better their relationship going forward. they do feel that their relationship is in a better place. >> we spoke this morning with jim and phil about the issues on which there is common ground between president obama and the business community. where is there no common ground? where are they totally at odds? >> there are probably a long list of issues there. the first and foremost maybe the regulatory front. whether it is rolling back the
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environmental protection agency whos, this is a president wants to leave a lasting legacy and i do not see this administration agreeing with major members of the business community on rolling back any changes if they are not forced to by a court of law. i don't think you will see any agreements there in terms of regulatory rollback, even if it is on the wish list of the ceo. >> jim, what is your perception? u deal with the business community all the time. what is their biggest issue with obama? >> i think you are probably right on the legacy around global warming. the president really is trying to use the administrative powers that he has had to deal with a congress that is not prepared to engage on that issue. the business community is much more receptive than the republican congress. >> absolutely. the business community recognizes that there are future costs involved and would look to
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the government as a partner on this stuff, but congress does not believe -- parts of congress does not believe that mobile warming exists. >> what do you think we are going to get from the ceos? are they going to ask the tough questions? or do they want to air on the side of being on good terms with the president? >> there are a couple of schools of thought. to go all been bernanke and jamie dimon, when he went after questions,inted there are rules -- respect the institution, respect the white house. whether they agree on policy, i don't think you will see any direct challenges but i think there will be tough questions. these guys have shareholders, they have businesses to run. this individual will determine a lot of what they are able to do in their businesses. i think that you will see good,
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solid questions. no one will be easing up, but no one will be disrespectful either. ceos areot like these cheering american -- the camp of the republican congress. >> this is a president who is a lame duck to these ceos as well, he is not as interesting or important a player today. the reality is that they do need to be late to the republican side of the equation as well. it would perhaps even be just as important to these guys to have mitch mcconnell in the same setting. many have been talking to republican leaders while they are here this week. mitch mcconnell is finally almost as important as the president. >> so, we are going to have a replay of the last four years from the support of business, where nothing happens? isn't the business community like the rest of the country, frustrated? >> but you are being rational. we have not had rational leaders
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in years. >> everyone has to engage with our leaders. for worse, we put them there and they need to know that we want them to get something done. >> we wanted them to get something done two years ago. are waitingtely, we for the president, we're to take a quick commercial break. jim, peter cook, phil mattingly, we will be back in two minutes. ♪
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>> minutes from now president obama will be speaking to ceo's in d.c.. >> plus the first shareholder meeting of the new microsoft
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ceo, he will deal with everything from diversity issues to the size of his pay package. stay with us. ♪
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♪ >> welcome back to "market makers." to hearve been waiting from president obama, as you can see the ceos are seated in washington it into your from the president. it could be any minute. let's take you back to our correspondence. peter cook, our chief washington correspondent. a quick question for you, how much of a tone that the president takes with the business community is your
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decision, how much of it is on the advice of valerie jarrett? >> a good question, valerie jarrett is really is top liaison to the business community in many cap -- many cases. that is actually a great questions. look, his advisers let him know how to approach the audience, but with something like this he's aware of the town that he needs to hit and aware of the perception in the business community of this white house and how it operates. he disagrees with it immensely, but he will try to address that going forward. he will try to give off that he heard what happened in the midterm elections, feels like there are areas that he can move forward on, and that that is the pitch he wants to make. like jim said earlier, he recognizes that the ceos really just want to get something done and that is the town he will try to hit. >> peter, you might want to jump in on this one, where his jack lew in this conversation? i would say that what people
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remember most about his tenure as treasury secretary is that he has gone after inversion deals and we have not really heard him say a lot else about economic policy. peter? >> you could say that he went after those deals reluctantly after initially telling the president that he couldn't. i can tell you that from covering him pretty close that closely, he does not operate in front of the cameras or the spotlight like we have seen. is a team that prefers to work behind the scenes, have their own conversations. with every town that he travels to he meets with business leaders, without cameras present. they know that he is a key player on issues like tax reform. he is a part of the and the president is obviously listening to his treasury secretary on these issues, but it is the president of the law ultimately cap these deals and that is why these meetings are important. the sense that you
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are getting, that the president does talk to jack lew and listen to jack lew, you are well on their -- well aware of the narrative that emerged, people stopped listening to chuck hagel . >> there is no question that the president listens to jack lew. this person served as his chief of staff. before he moved them over to treasury secretary, he knows the issues, these budget and tax issues as well as anyone in washington. he goes way back with a lot of these people. he is a player, but it does not not,r if he is a player or there are so many other factors involved in getting these deals done. he will be part of the mix. >> we need to break in. president obama is taking the podium now. are good.that sales i want to spend most of my time, as i usually do, taking questions. i want to thank randall and the
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rest of the executive committee for the opportunity to speak with you here today. you a sense ofe where i think our economy currently is, what is happening around the world and what i think it should be. us here innces for washington to accelerate rather than impede some of the progress we have made. ,round this time six years ago america's businesses were shedding about 800 thousand jobs per month. today our businesses, including some of the most important businesses in the world, represented here today, have created over 10.6 million new jobs. 56 months of uninterrupted job growth, which is the longest private sector job growth in our history. we just saw the best six months of economic growth in over a decade. for the first time in six years the unemployment rate is under 6%.
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all told, the united states of america over the last six years have put more people back to work in europe, japan, and the rest of the advanced world combined. that is a record for us to build on. at the same time what we have been doing is working on restructuring and rebuilding our economy for sustained long-term growth. manufacturing has grown. the auto industry has had its strongest sales since 2007. our deficits have shrunk by about two thirds, something that i think very few people in the anticipated three or four years ago. when it comes to health care costs, premiums have gone up at the lowest pace on record, which means that a lot of the businesses here are saving money, as are a lot of consumers. on the education front, high school education is up, math and
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reading scores have improved. internationally our exports continue to hit record levels. on energy we have seen a revolution that has changed not just the economy, but is also changing geopolitics. not only is oil and natural gas production up, in part because of the technological changes that have taken place, but we have also doubled our production of clean energy. solar energy is up about 10 fold. wind energy is up about threefold. unit costs for the production of down energy are dropping to where they are getting close to being competitive to fossil fuels. as a consequence, we have been able to reduce carbon emissions because of climate change. most of the other industrialized countries. the bottom line is that america
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continues to lead. , i wasand i were talking with his people in brisbane, australia. g-20, what was striking was the degree of optimism that the world felt about the american economy. and optimism that is in some ways greater than how americans feel about the american economy. i think that what you saw among andd leaders is consistent what we know from global surveys, when you ask people now about the number one is to ask, it is the united states of america. china for why sometime, but now folks want to put money back into this country and a lot of that has to do with having to best workers in the world, the best university system, research and the bestnt,
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businesses in the world. of you cant a lot take great credit for the kind of bounceback we have seen over the last six years. having said all that i think i reckon guys that we have more progress to make. i put it in a couple of categories. there are some common sense things that we should be doing that we are not doing. the reason, primarily, is because of politics and ideological gridlock. but i suspect that if we surveyed the folks here regardless of hearty affiliation , you would say -- let's get this done. infrastructure is one area where we need to go ahead and make some significant investments. anyone who travels around the what airportss at outside the united states look like, roads, trains, ports, itports, they recognize that makes no sense for us to have a
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first-class economy but a second-class infrastructure. that would help to not only accelerate the growth right now, it would also lay the foundation for growth in the future. tax reform, an area that i know is of great interest to the business roundtable. i have consistently said that for us to have a system in which of the twopaper one or three highest tax rates in the world when it comes to corporate taxation, but in practice there are so many loopholes that you get huge variations between what companies pay, it doesn't make sense and we should be able to smooth that system out, streamlined it in such a way that allows us to lower rates, close loopholes, and make for a much more efficient system, where folks are not wasting a lot of time trying to hire accountants and lawyers to get out of paying taxes, but have
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some certainty and raise much -- just as much money on a simpler system. that is something that i think we should be doing. trade. in asia there is a great hunger for engagement with united states of america and the transpacific partnership is moving forward. michael furman is here and he has been working nonstop. i promised his family that he will be home sometime soon. are optimistic about being able to get a deal done and we are reinvigorating the negotiations with the europeans trade deal.lantic if we can get that done, that is good for american businesses and american jobs, and it is actually good for labor and environmental interests around the world. we are trying to raise standards so that everybody is on a higher but level playing field. i think that your help on that
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process could make an enormous difference. immigration reform, i recognize that there has been some controversy around the executive actions i have taken. on the other hand, i think that -- brt hasbart recognized that this will help us grow the economy faster and reduce the deficit, giving us the capacity to bring in high skill folks that we should want to graduate -- gravitate towards the united states to start businesses, creating new products and services and continuing in the tradition of economic dynamism that is the hallmark of the united states of america. i am still hopeful that we can get legislation done. if we get legislation done, it will supplant a lot of the actions i have taken, which i'd knowledge are incomplete, but will allow us to make some moves
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on the contemporary if we do get some moves done. so, the good news, despite the fact that obviously the midterm elections did not turn out exactly as i had hoped. there remains an enormous areas of potential bipartisan action and progress. i have already spoken the speaker bader and senator mitch mcconnell. thati have said to them is i am prepared to work with them on areas where we agree, recognizing that there will be some areas where we just don't. one of the habits that this tower has to break is this notion that if you disagree on one thing, suddenly everybody takes their ball home and they don't play. i think that there has to be the capacity for us to say -- this is an area where we will have
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some vigorous disagreement, but here are some areas where we have a common vision, let's go ahead and get that done, build some momentum. let's work those muscles to sign some legislation and give the american people some confidence that those of us who have the extraordinary privilege of being placed in leadership are able to actually deliver for the american people. one final point that i will make , i started off by talking about how generally optimistic i am about the economic future. there are some concerns on the horizon. obviously, japan being weak and europe being weak means that the united states, even as we chug along, could be pulled back by global weakness. not only in europe and japan, but in the emerging markets.
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that is how you will be able to get them to see stronger growth. domestically, the area where i have the deepest concern is the fact that although corporate profits are at their highest levels in 60 years, the stock market is up 150%, wages and incomes still have not gone up significantly. they have certainly not picked up the way that they did in earlier generations. that is part of what is causing the disquiet in the general public, even though the look good.umbers one thing i would like to work to ask some on is tricky but important questions about how we can make sure that prosperity is broad-based. i actually think that when you look at the history of this
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country, when wages are good and consumers feel like they have some money in their pocket, and winds of being good for business, not bad for business. i think that most of you would agree with that. unfortunately, the overall trend even ase been that productivity goes up, wages as a share of overall gdp have shrunk. that is part of what is creating ,n undertow of pessimism despite generally good economic notes. i think that there are concrete things that can be done to address that and i will be working with the brt to see if we can make progress on those as well. all right? it up for let's open questions. randall? >> i will do that. your comments as relates to tax reform have been consistent.
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over the last couple of days we have been talking a lot about what the things are that are most critical for driving middle income job growth and for us it always comes back to investment. the more that we invest, the more that we hire, the more the middle income wages grow. the best part about the job growth, you have touched on it, inconsistent tax reform. to us noticing a factor could be more important. do you think it would be useful to have someone within your administration of weighted to date at this is a priority to me and we will or with the individual in congress and see if this is a priority that they can drive through. it is like there is a timeframe bothcan be done when they seemed receptive and we would be open to working with you or someone specifically in your administration. >> jack lew is here.
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our treasury secretary. my understanding is that he does not have enough to do, so we should put him to work. me give more detail about the prospects for tax reform. out a white paper, a general concept on corporate tax reform, several years ago. when timothy geithner was still treasury secretary and, i think, -- brt has been and we have discussed the possibility of some ofle to bring in the money trapped outside the country right now. in a one-time transaction potentially using that to pay for infrastructure improvement. i think that there is some openness to that.
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the current house ways and means butittee chairman put out overall conceptually he also agrees in lower lip -- lower rates," polls, and the minimum tax oblique that ensures that folks are not gaming the system but also allows you to be based inve with folks other countries operating on a territorial basis. so, there is definitely a deal to be done. there are two big hurdles we will have to get over. the first is a classic problem, which is that people are in favor of tax reform in the abstract, but sometimes more
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concerned with tax reform in the specifics. if we are going to accomplish revenue neutral tax reform the substantially lowers the world for rate, then we have to go some deductions that people are very comfortable with. there will be some winners and losers in the short-term, but in the long-term there will be less storage and in the economy and the capital-- and will be distributed evenly. are the folks willing and ready to go ahead and make that move for the sake of a simpler, more streamlined, more sensible tax system? if not, it's not going to happen.
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all of you in this room have employees businesses, plant anything to the likelihood of getting something done is low. the second problem is solvable, but tricky. i think that maine are -- boehner has echoed this. they are interested in combining ,t individual tax reform partially because they are concerned about corporations not being able to benefit the way that larger companies do. we are actually committed to
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providing simpler and lower tax rates for small businesses as well. what we are not willing to do is to structure a tax deal in which either it blows up the deficit, essentially we cannot pay for the revenue that is lost, or taxrnatively that you get shifting from businesses the middle class and working families. start introducing the individual side, it gets more complicated in terms of who is benefiting, what are the rates, how is it structured? my view is that if we start with the corporate side, it is a more discrete problem with fewer
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variables and moving parts. and then we can potentially have a broader conversation about tax reform. that may not eat how the republicans view the situation. being a hangd up up. one last point i would make that relates to the issue of individual tax reform, but also relates to one of the debates taking place during the lame-duck, tax extenders. as a general rule, we are open of many-term extensions of those provisions to make sure that all of you will be able to engage in basic tax planning, at least for the next couple of years, and are not having to scramble to figure out what the rules are. but more broadly we would like taxee if some of those
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extending provisions, including things that i strongly support, like research and development, are better brought into a comprehensive tax reform package . in order to do that, i want to make sure that some revisions that and if it working families are included in that package. the child tax credit. hugely important for a lot of working families. the earned income tax credit, hugely important for a lot of working families. something that has been historically supported on a bipartisan basis as it encourages work but says that if you are working full-time we will make sure to do everything you can as you do the right thing to take responsibility. there is a college tuition tax credit that benefits a lot of families, sometimes families who get caught.
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they are not quite poor enough do the pell grants, but they not have enough money to really be able to manage college costs. workingll be some class, middle class, working that have toions be incorporated if we are to tax theome of these dungeons and tax breaks as well. hopefully, that gives you a sense of optimism on my part, but cautious optimism. be somethat there will real challenges, but we are absolutely committed to working with speaker boehner and mitch mcconnell, as well as the bart and other interests in seeing if we can get this thing done. the time is right and you are right, the window is not going open to wide and it will start narrowing the closer we get to the next presidential election, which always seems to start the day after the last
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election, so. >> mr. president, thank you for being with us. also, thank you for explaining a little bit more what you are thinking about for tax reform. i also just want to underline are the tax extenders important to all of us in this room. it is about capital investment that drives income growth for middle-class families. our company serves 30,000 communities in rural america, so that is important to us. one of the other things important to us is a continuing resolution to get the gut -- keep the government going. >> me to. [laughter] >> can you talk again about how we do not have the chance arts on that subject? writes i have been encouraged by recent
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statements from the speaker and the leader about their interest in preventing another government shutdown. i take them at their word. look, the federal government is -- process generally >> how should i put it? not ideal. have a longerld .ime frames, greater certainty we would be able to distinguish between capital investments that are going to have long-term payoffs and short-term operating expenses. just notlly that is how the budget process has been structured. since the plane is constantly flying. the tendency is just to kick the
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can down the road with a series of continuing resolutions. there has been an effort to try to get back to regular procedures and to systematically look through these budgets. there was talk of and on the bill,ill -- omnibus rather than a continuing resolution. it will be useful to get it directly from the speaker at this point. the one thing that i can say for certain is that no one benefits by the government shutting down, and it is entirely unacceptable for us to not maintain the full faith and credit of the united dates government and we just thatt afford to engage in kind of brinksmanship that we saw over the last of live years. each time that it happened, consumer sentiment plunged, it was a self-inflicted wound, and
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we had to dig ourselves back out of the whole despite all of the been madeat had simply because of people's confidence in the system overall being shaken. so, my strong hope is that we do not repeat that. principal that can prevent that is what i already articulated. we have to be able to disagree on some things while going ahead and managing the people's business and working on the things where we do agree. democracy is messy, but it does not have to be chaos. i have been encouraged, as i said, so far, by the statements from republican leadership. somen fact, we can get certainty on the budget for the next year, that then gives us the window to work on tax reform.
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this is news in all of the incredible progress we have made on our short-term deficits. nobody talks about them anymore. i will say that that is one of the frustrating things about washington, people are really good about hollering about problems but then when we solve them, no one talks about it. we have made extraordinary progress in reducing short-term deficits. we still have long-term liability to worry about. some of those problems, though, have been addressed or are being addressed by changes in the health care delivery system, which has been a huge driver of long-term federal debt. i think that i mentioned earlier that health care inflation has gone up at the slowest rate in 50 years. far slower than had been or by theby cbo
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actuaries for medicare. we have already been able to book $180 billion over the next 10 years and reduce health care outlays. i actually think that we can get more done as some of the delivery system performances that we talked about are put in there is good news on the budget. now, what we have to do is create a framework in which not low do we keep our deficits and we are able to start dragging down our debt, but we are also able to make some core investments that i mentioned earlier. educationructure, in and early childhood education is where we can make a lot of progress, in basic research and science -- i was at nah yesterday


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